Rio Tinto (LSE: RIO) shares are changing hands around 5,358p, as I write. However, the stock went above 6,400p in 2021. Is this a buying opportunity for me? Let’s examine the pros and cons.
To put the decline in the share price into perspective, over the past year it’s up about 19%. So, there’s been a lot of volatility. Nevertheless, the current level is more than 250% higher than the 2016 low of around 1,500p.
Can Rio Tinto be a long-term winner?
Will Rio Tinto go on from here to be a long-term winner for investors? It’s possible, but I’m mindful of the huge cyclicality in the underlying mining business. And I reckon there’s potential for a range of outcomes for shareholders. But will I be one of them?
Last year, the company made around 87% of its adjusted underlying earnings from iron ore. It also deals in aluminium, copper and minerals. But the price of iron ore is a big influence on the financial outcomes for the business.
And the commodity had a good year in 2021. A huge spike higher in the price started in the spring of 2020 and topped-out in July 2021. Today, with the price around $91 per metric tonne, it’s around 60% lower than the peak.
The lower commodity price has caused City analysts to pencil-in reduced earnings ahead for Rio Tinto. They expect a decline of almost 37% in 2022 and further fall of around 24% in 2023.
But will the price of iron ore continue its down-trend and take Rio’s earning lower? There’s no easy answer. However, iron is used to make steel for buildings, vehicles, white goods and many other finished products. And global economic growth is the main driver of supply and demand.
Will China prosper?
So, when economies are growing, steel demand rises and the price of iron tends to go higher as well. But China is the world’s biggest metals consumer. So, to invest in Rio Tinto I need an opinion about China’s economic prospects. The trouble is, I’m not clever enough to have one!
But I do know the Rio Tinto share price is sitting near its long-term highs. And I also know the company has enjoyed a multi-year period of bumper profits. So, could that mean the business and the share price are near a cyclical high? It could do. And if that proves to be correct, the next move for profits and the share price could be lower as it cycles down again.
I’m holding my hands up and saying I have no idea what will happen next. However, when investing in big miners like this, it’s best for me to form an opinion about the outlook for the wider economy, and then aim to invest near a cyclical low for the business.
Yet for me, there’s too much uncertainty about where Rio Tinto is in its business cycle. So, I’m avoiding the stock for the time being. However, the valuation looks modest and the balance sheet seems strong. I could easily be wrong and the business could thrive in the years ahead driving worthwhile returns for shareholders.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022